DBS Research: Playing Safe With Defensive & Yield Stocks In 2H2017

Following the previous article on DBS Research’s outlook and investment themes for the market in 2H17, we zoom in on the stay safe with yield investment theme recommended by them.

We highlight five possible defensive and yield stocks that investors can add to their portfolio to ride the market in 2H17.

1. Sheng Siong Group Limited

As a yield play, earnings and margins visibility is important to give investors a clearer view of the profitability of the company in the upcoming quarters.

The reason why Sheng Siong Group was chosen as a yield play is precisely that of its clearer margin visibility on the back of the expansion of its distribution centre.

DBS Research believes that the expansion of its distribution centre will help Sheng Siong to grow and sustain gross margins. The increasing autonomy in direct sourcing, bulk handling, and a fresh mix is expected to contribute to Sheng Siong’s earnings growth as well.

At 20.6x FY18F PE, Sheng Siong’s valuation is attractive for investors, especially when compared to historical average of 23x since listing. Its dividend yield of 4.1% also remains an attractive feature of the stock.

2. Singapore Technologies Engineering Limited

Heading into 2H17, Singapore Technologies Engineering (ST Engineering) is undergoing a strategic corporate shift to direct its focus on smart products of the feature, for example, autonomous vehicles and smart healthcare systems.

On the other hand, the management is trying to rationalise its loss-making businesses, such as the disposal of loss-making Chinese specialty vehicle subsidiaries in FY16.

DBS Research foresees the smart products becoming a key revenue growth driver for ST Engineering in the future, given the expected significant expansion of the smart city market.

DBS Research opines that ST Engineering could leverage on its balance sheet to fund mergers and acquisitions (M&As) of smart city related companies to propel its growth.

From a yield play perspective, the strong order wins has boosted ST Engineering’s order book to near all-time high levels to provide stronger near-term visibility on earnings.

DBS Research also expects reduced earnings drag following the divestment of its loss-making Land Systems entities. Oil & gas projects on the marine order book are also slowing easing.

ST Engineering also stands to benefit from tailwinds in the US in the form of higher defence spending and tax cuts. In addition, the recent rise in terrorism activities could also fuel higher defence spending across the globe.

ST Engineering’s defense-related engineering capabilities should place it high amongst investors who are looking for exposure to the defence market. This should give rise to a scarcity premium for ST Engineering.

3. Keppel REIT

REITs continue to be a relevant investment class for yield plays, given the general yield spread of 4.0% over the risk-free rate.

The market has been positioning themselves for a potential recovery in the office market in 2018. Investors looking to invest in Keppel REIT are looking at an attractive on a per square foot (PSF) basis, according to DBS Research’s analysts.

Keppel REIT’s Singapore Grade A office portfolio is trading at an implied value of ~$2,450 PSF compared to recent office market transactions at between $2,700-3,500 PSF.

As there are abundant liquidity and positive sentiments on the Singapore office market, DBS Research believes that capital values for office properties will remain resilient in the near term.

5. Mapletree Greater China Commercial Trust

Historically, the general market has been pricing Mapletree Greater China Commercial Trust at a significant discount to book value. It was mostly because Singapore investors are not familiar with the Hong Kong and China commercial markets and foreign exchange risks.

However, DBS Research believes that Mapletree Greater China Commercial Trust’s strong four-year track record since its listing in March 2013 might close the pricing gap.

With a portfolio located in irreplaceable locations, Mapletree Greater China Commercial Trust’s forward yield could re-rate to 6.0%, up from its current yield of 6.9 percent. That will be more consistent with the forward yield of its HK peers.

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They’ll be covering topics on personal finance, macroeconomics and investment strategies to help retail investors make more shrewd decisions especially in the current uncertain and volatile economy. Click on the button above to learn more and grab your early bird tickets. See you there!